Foreign Exchange-5/10/17

Foreign Exchange 

• Foreign Exchange:
  - The buying and selling of currency
  - In order to purchase souvenirs in France, it is first necessary for Americans to sell their dollars and buy euros
  -Any transactions that occurs in the Balance of Payments necessities foreign exchange.
  -The exchange rate is determined in the  foreign currency markets.
  
  
• Changes in Exchange Rates:
  -Exchange rates are a function of the supply and demand for currency.
• Exchange Rates Determinants:
  1) Consumer tastes
  2) Relative income
  3) Relative price level
  4) Speculation
• Exports and Imports:
  -The exchange rate is a determinant of both exports and imports
  -Appreciation of the dollar causes American goods to be relatively more expensive and foreign goods to be relatively cheaper thus reducing exports and increasing imports
  -Depreciation of the dollar causes American goods to be relatively cheaper and foreign goods to be relatively cheaper and foreign goods to be relatively more expensive; thus, increasing exports and reducing imports.